The UK financial regulator has given insurance company Aviva a slap on the wrist over its conduct two years ago when it was thinking of cancelling its preference shares.
The Financial Conduct Authority said on Monday that Aviva “failed to consider properly its obligations” when making announcements about its plan, although it stopped short of fining the company.
Owners of the insurer’s preference shares were outraged in March 2018 when the company raised the possibility that it could cancel the shares at par value, which was below where they were trading. The announcement took the market by surprise and drove the price of the preference shares down between 20 per cent and 26 per cent.
Investors threatened legal action and parliament’s Treasury select committee asked the FCA to look into the issue.
“Aviva failed to consider adequately how the announcement might be interpreted by the market, especially the holders of the preference shares,” the FCA said in a statement.
It added: “Aviva knew that a significant proportion of the preference shareholders were retail investors, but it did not make clear that it had made no decision to cancel the preference shares.”
Aviva’s £450m of preference shares carry a coupon of 8 per cent to 9 per cent and rank above ordinary share dividends in terms of priority. They are an expensive form of funding for Aviva.
The controversy forced the company to clarify that it was not going to cancel the shares, and it also set up a £14m compensation scheme for investors who had lost money because of the fall in the share price after the initial announcement.
Aviva has accepted the FCA’s censure over the issue. In a statement, the company said: “This was a disappointing episode for which we are sorry and lessons have been learned.”
It added: “We recognise the uncertainty created for preference shareholders two years ago whilst we were considering our options and we subsequently made discretionary goodwill payments to impacted preference shareholders.”
Aviva’s shares rose almost 3 per cent on Monday.
One person familiar with the FCA investigation said the two and half years it took to reach a decision to censure Aviva was “nothing abnormal”. The person added: “These things can often take a while.”
Monique Melis, a former UK regulator who is now global head of compliance and regulatory consulting at Duff & Phelps, suggested the timeframe reflected the need to get a price-sensitive decision right.
“Any investigation into the transparency rules requires great care by the regulator,” she said. “At times it is a delicate dance to get everything 100 per cent right in terms of both tone and decisions that affect price.”
Since the preference share scandal, Aviva has changed its chairman, chief executive and finance director.
Amanda Blanc became chief executive earlier this year and has promised to focus the business on its operations in the UK, Ireland and Canada. She has already sold the Singapore business, and some of the continental European operations, such as those in France or Italy, could be next to go.
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